Trade tensions between the US and China have so far only had a very limited impact on FedEx's business but the company warns that the uncertainty surrounding them is affecting the market.
Earlier this week, the US released a list of approximately $200 billion worth of Chinese imports that will be subject to additional tariffs from September 24, initially at a rate of 10% and increasing to 25% from January 1, 2019.
The introduction of 10% tariffs on $200 billion worth of Chinese imports has been widely expected since US President Donald Trump in July ordered the office of the US Trade Representative (USTR) to begin the process of imposing tariffs of 10% on an additional $200 billion of Chinese imports across thousands of product categories from food and consumer goods to chemicals and industrial equipment, in addition to the initial 25% tariffs on US$50 billion of Chinese import goods.
China has retaliated, outlining plans to impose new tariffs of $60 billion on US exports, prompting President Trump to reiterate a threat to go even further with the raft of trade sanctions, slapping tariffs on approximately $267 billion of additional imports.
Quizzed on the issue at a Q1 results call with analysts, Raj Subramaniam, executive vice president, chief marketing and communications officer, replied: “The China-US lane bi-directionally represents roughly 2% of our total revenues. The tariffs that have been implemented so far only accounts to less than 10% of that volume. And then if new tariffs are implemented on the $200 billion of imports that's being considered, that might impact roughly a quarter of that 2%.
“So that gives you a frame of reference for what we are talking about in the context of the whole enterprise. Now having said that, the uncertainty around the issue and the potential for additional tariffs is affecting the market and we're beginning to see some of the economic activity in China starting to moderate as a result of that.”
He underlined that it was very difficult to predict the future course of tariff implementation and that FedEx was monitoring the situation very carefully and would adjust its strategies according to market conditions. “Clearly, we continue to support lower trade barriers for all our customers.”
Subramaniam said FedEx had not yet seen any significant shifts in customers' supply chains as a result of tariff concerns.
“However, if the situation continues for any amount of time, we do expect customers to diversify their supply chains and perhaps some of the trade patterns might change. And the good news here is that FedEx has got a large unparalleled global network that can flex and adjust and support our customer needs as they make their changes. I want to emphasize that the scale and flexibility of FedEx will enable us to deliver strong results despite any uncertainty on trades and tariffs.”
On the subject of TNT, president and chief operating officer, Dave Bronczek, told analysts that “very good progress” continued to be made with the integration.
“The integration of our sales team is well underway, and we will complete the sales integration this fiscal year. During the first quarter, integration activities began in all of our major markets in Europe, and we anticipate the completion of the integration in the Middle East at the end of this calendar year. Our integration of TNT continues to expand our network, improve our global capabilities and our competitive posture and of course, increase profitability. We are very confident in reaching the $1.2 billion to $1.5 billion of operating income improvement at FedEx Express in full year ’20 over full year ’17.”
Asked to comment on the biggest opportunities for market share gains with a combined TNT FedEx network, Subramaniam replied: “Clearly the opportunities are very large. As you all may know, TNT and now FedEx has a fantastic ground network that handles parcels and pallets in Europe. TNT is a key player for intra-European ground markets and key domestic markets in Europe. Of course, don’t forget that TNT also has a terrific ground networks in Middle East, in Asia and Latin America. So when we combine that with FedEx’s unparalleled intercontinental air system, we have a unique network that allows us to offer new value to our customers in a very cost- effective manner.”
Responding to a question about the competitive threat posed by Amazon and whether this had intensified with the rollout of its Delivery Service Partner Network – a new programme designed to allow US-based entrepreneurs to run their own local delivery networks and provide much-needed capacity to the online retailing giant, Subramaniam remarked: “As I mentioned at previous calls, Amazon is a long standing customer of ours. However, not one customer represents more than 3% of our revenue and Amazon is not our largest customer. Amazon and other customers of ours have certain elements of the logistics in-sourced to deal with capacity issues as well as inventory management. And while there has been significant media interest in what Amazon is doing to expand their in-source delivery capability, this should not be confused as competition with FedEx.”
He added: “The global infrastructure, the technology, the capabilities and knowledge that are needed to compete in our business is quite extraordinary and we have built that up over 40 plus years.”
